Businesses claiming R&D Tax Credits soon find that the return of this generous scheme becomes integral to their cash flow.
The financial impact of reclaiming up to 27% of yearly R&D expenditure is profound, so many businesses are more than happy to accept claims at face value. And that’s understandable as it’s essentially free money.*
However, it’s commonplace that (without specialist guidance) many businesses undervalue their R&D claims and receive a smaller return than they’re entitled to.
You might find the return of your R&D Tax Credit claims to be totally satisfactory, but what if your £25,000 claim could have been a £60,000 claim?
Then, you’re looking at a £35,000 shortfall. Just think what you could do with that extra cash injection, year after year!
In this blog, we’re going to discuss some of the core requisites of a fully maximised R&D Tax Credit claim. Implement these tips to be sure you’re getting the most out of Research & Development Tax Relief.
💡 Don’t underestimate the importance of the technical narrative
Your technical narrative is the heart of your R&D Tax Credit application. It’s your chance to prove that you conducted research and development, by illustrating the technical or scientific uncertainty that your project endeavoured to overcome.
Writing from the technical perspective that HMRC are looking for is what differentiates a DIY R&D Claim from those that are completed and submitted by experienced R&D Tax Credit Specialists.
Naturally, you’ll know the ins and outs of your project and the wider landscape of your sector. But seasoned R&D Tax Credit Experts know exactly how to present your projects as clearly-stated advances in innovation, giving HMRC no reason to raise questions or request clarification through an enquiry – which can delay your tax benefit by months.
By filing your R and D Tax Credits with an expert such as Claim Capital, you can rest assured that HMRC will find everything they’re looking for. And in the unlikely event of an HMRC enquiry, we’ll handle it at speed, and at no extra cost.
💡 Omit jargon from the technical narrative
Something that a lot of applicants can't resist doing is using a lot of over-complicated language and terminology. In truth, filling your technical narrative with sector-specific jargon won’t make your claim appear more credible. In fact, it might have the opposite effect.
HMRC inspectors have a huge number of submissions to get through, if your technical narrative isn’t totally digestible for readers outside of your field, it’s unlikely they’ll be willing to decode what you’ve presented.
Remember - you want HMRC to clearly understand the problem your project has solved, as well as the lengths you’ve gone to solve it.
💡 Understand your company’s relationship with subcontractors and EPWs
If a portion of your R&D work is done by outsourced staff, it’s vital to clearly document the nature of the relationship you have with them.
When it comes to filing R and D Tax Credits, HMRC will expect to be informed whether they are subcontractors – providing a service to you, or externally provided workers (EPWs) – providing labour with supervision, direction and control remaining in your hands.
This distinction is particularly important when claiming under the RDEC R&D Tax Credit scheme, where only EPWs are typically included in a claim.
💡 Remember to include pre-trading expenses in your first R&D claim
For newly incorporated businesses, it’s important to factor any pre-trading R&D spending into your R&D Tax Credit claim.
A lot of the time, research and development has to have been conducted before a company is able to begin trade.
Good news - this pre-trading expenditure can be included in your R & D claim, and will usually return a cash benefit!
💡 Consider moving your losses around
A fantastic tool for maximising the return of R&D claims involved ‘moving around’ your losses, which is also referred to as ‘surrendering your losses’. Surrendering your losses means that unprofitable companies can receive their tax benefit in cash directly into their bank account.
Is this strategy something you should consider?
In general, it’s better to carry your losses forward and offset them against future profits, at a rate of 25% (the lowest rate corporation tax is charged at), than to surrender it immediately at a rate of 10%. But to be offset successfully in the future, you need to have actual profit recorded.
Here’s what we’d suggest: If you’re expecting continued tax losses in the years to come, then you should surrender the present loss.
Carrying losses around can become a complex procedure, but it could certainly pay off by providing your business with a much greater return.
Rather than moving your losses around yourself, it’s always best to rely on an experienced R&D Tax Specialist to guide you through the process.
💡 Work with an R&D Tax Credit Specialist
When filing an R&D Tax Credit claim, businesses have three options to choose from: they have a go at doing it themselves; they add it to their accountant’s To Do list; or they use a specialist R&D Tax Credit provider.
DIY R&D claims are rarely attempted. The reason why is evident - trying to get to grips with such a complicated area of tax would detract entrepreneurs from the tasks that need to be maintained in order to keep the business moving.
Plus, there just isn’t enough material out there that’s comprehensive enough to teach you everything you need to know.
Some businesses offload their research and development tax credits to their accountant. In this scenario, there’s an important distinction to be made between successful claims and maximised claims.
An accountant will likely be qualified to fulfil the financial report, but they’ll be much less confident with deciding which activities undertaken by the client are classed as R&D.
In fact, unlike most areas of accountancy, R&D Tax Credit claims are less about tax and more about research and development.
So whilst your accountant may be delivering R&D claims that pass HMRC’s inspection, they could be hugely undervaluing your R&D Tax Credit claim by inadvertently leaving out details that only an R&D expert can recognise.
Through working with hundreds of startups and SMEs, we have seen this happen first-hand.
After our client, Unissu, worked with us for their 2020 R&D claim, they were concerned that they had underclaimed for previous years.
Unissu asked us to review their previous R&D Tax Credits, and our team of Specialists uncovered that their accountants had undervalued their claim by £32,000.
These 6 tips offer an insight into how we secure maximised R&D Tax Credit claims for our clients.
To get the most out of R&D Tax Relief, and ensure that you’re reinvesting the maximum return into your business, let our R&D Specialists at Claim Capital take care of your annual claims.
To get started, or assess your eligibility, schedule a free, no-obligation claim consultation today.
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.